Cost Question Orbits Sirius Satellite

Analysts smell cash burning in the possible launch of a fourth satellite to boost coverage.
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Sirius Satellite Radio

(SIRI) - Get Report

debates the launch of another satellite, investors mull the costs.

Already burning through piles of cash to fund its money-losing subscription radio business, Sirius now faces a big capital spending decision. The New York-based pay radio shop is considering what to do with its fourth satellite, which currently sits on the ground serving as a backup in the event of trouble with any of its three orbiting satellites.

The company is weighing whether or not to launch the satellite early in an effort to boost its signal coverage, Bear Stearns analyst Bob Peck said in a research note Wednesday.

The debate centers on where the new satellite would orbit, says Peck. He adds that Sirius could choose a so-called geostationary orbit -- one that would fix the satellite in relation to one spot on the earth -- rather than the elliptical orbit that its other satellites use. But the new orbit would demand the reconfiguration of some gear.

That job could take most of a year and costs as much as $50 million, Peck estimates. Though Peck says launching the fourth satellite is a good move, he points out that it will put pressure on the company to raise more cash. Peck has a neutral rating on the stock.

Both Sirius and sole rival

XM Satellite Radio

(XMSR)

have caught on with investors who have been willing to ignore big costs and concentrate on growth as satellite radio attempts to reach the consumer mass market. But critics have long charged that the companies are risky investments that require continual financing until some distant date when the operations turn profitable.

There are two choices, says April Horace, an analyst with Hoefer & Arnett. Sirius could send the $130 million satellite up to boost signal power. Or it could instead beef up repeaters on the ground.

Horace says the company should launch its spare to better serve products in the future. New mobile devices like handheld radios and cell phones will require better coverage, says Horace.

"Mobility down to a cell phone probably wasn't contemplated when they originally put their satellite plan together," says Horace, who has a buy rating on the stock.

But increased demand for stronger signals will boost the need for cash. Bear's Peck says refurbishing the fourth satellite and building a fifth as a spare will likely cost between $200 million and $275 million in capital spending over the next year.

Analysts say Sirius tested the high-yield debt market in March and failed to find favorable terms to raise more cash. The concern among some shareholders is that the company could try to sell more stock to raise money, a move that would dilute the holdings of current investors.

Sirius didn't return a call seeking comment. Shares fell a penny to $5.48 amid a broad market rally in midafternoon trading Wednesday.